Backlogs. We all have them in one form or another. Whether the term references projects, receivables, or to-do lists, there are real benefits found in monitoring your backlog.
In its roughest definition, a backlog is simply work that needs to be performed that has not been completed yet. For companies, backlogs can refer to everything from paperwork to producing product orders. In this article, we’re going to focus on why monitoring your sales order backlog is vital.
Monitoring Your Backlog
So why is it important to monitor your backlog? You know it’s there. Anyone who sells anything has a backlog. It’s impossible to fulfill all orders instantaneously.
It’s Important – No Really, It Is Important
It’s important because a company’s backlog is another one of those health indicators. A healthy backlog that is fulfilled timely indicates your product is in demand. It may also show your company is growing. However, if it grows too fast and gets too big, and you can’t fulfill it timely, you run the risk of having angry customers who no longer want to do business with you. Angry customers tend to be more vocal than happy customers, which may damage your future sales with your lost customer and prospective customers.
Conversely, if your backlog shrinks abruptly or over time, this could be a harbinger of slowing demand or issues in production.
Monitoring Metrics & Measurements
Part of understanding your backlog is knowing your production processes and capacity. This monitoring allows you to measure your sales, determine your output, and develop metrics. Having these metrics in place will help you monitor your backlog to help determine the source of any hold-ups. For example, you’ll want to be able to determine if your backlog is due to an increase in sales or a drop in production.
One way to help do that is by using a sales backlog ratio. The higher the number, the smaller the backlogs. You can express the ratio in dollars or units depending on what makes sense for your sales force. Let’s look at the ratio in units.
Sales Backlog Ratio = Backlog in Units / Total Sales in Units
For simplicity’s sake, let’s throw some round numbers into the equation. Let’s say you sell 100 widgets and have a backlog of 10 widgets in a week. It would look like this:
Sales Backlog Ratio = 10 / 100
As a ratio, this is 1:10 or 10% of orders are backlogged a week. Watching the ratio’s trend will show what’s happening with orders and the backlog. If capacity remains the same and the ratio trends upwards, it indicates an increasing backlog. Conversely, if the trend drops, the fulfillment team is catching up to demand. Catching up could ultimately mean a slowing in demand and should be monitored.
Opportunity or Cost – Opportunity Cost
Keeping an eye on the backlog and the ratio’s trend can help your company determine if you have an opportunity to grow or potentially if you’re missing out on potential sales.
Scaling your business at the right times is sometimes a combination of fate, skill, and luck all coming together. Watching your backlog trends can help place more cards in your favor by helping ensure your sales don’t outpace your operations or warning you of a potential cash shortfall in the near future.
Best practices for backlog management incorporate both monitoring demand and capacity. Part of managing your controllables include revamping your business processes to ensure they stay best in class and investing in expanding your capacity when necessary.
Overcome the Cost of Expansion
Some businesses experience a growth spurt overnight. This can happen with a design that goes viral and doubles your orders or a new construction project that requires a heavy investment in equipment and manpower.
For other companies, they’ve seen the writing on the wall. The backlog keeps growing. They need to invest in expanding their capacity.
On top of the excitement of growing exponentially overnight comes the hard reality of needing cash upfront to capitalize on an amazing opportunity.
In both of these scenarios, financing comes into play. Working with a lending consultant is most advantageous. There are multiple financing options available that allow companies to take advantage of increasing sales and continue to grow.
The Liquid Ally Difference
The world of financing is expansive. Going it alone can be daunting, to say the least. This is why our mission at Liquid Ally is to help companies find the right financial package for their current situation. With over 25 years of experience, we’ve learned not all funding options are the same.
We work diligently as a liaison between you and our lenders to ensure an easy and transparent process. The result is a financing option that gets your cash fast, with terms that fit your needs.
To discuss how Liquid Ally can assist you with your next lending project, give us a call or send us an email. We’d love to help secure an excellent funding package for your company and help you grow your business to take advantage of your backlog.